Line of credit

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A line of credit (LOC) is an account type that allows borrowing from a preset limit. They can be secured or unsecured.

A secured line of credit is usually secured by equity in your home, and is known as a home equity line of credit (HELOC). The unsecured type carries a higher interest rate on negative balances. These are often called a personal line of credit.

Applying for a line of credit

You can't automatically get a line of credit as it's equivalent to borrowing money. You have to apply at your financial institution. You need to decide for which type you qualify.

If you have paid off some of your mortgage you may get a secured line of credit. This is only possible if you have enough equity in your home. You can usually borrow 65% of your total equity up to a maximum of 80% if taken at the same time as your mortgage[1]. This option will offer a lower interest rate.

If you have a good credit history and means to repay the line of credit, you will qualify for a personal line of credit. The lender will usually want to verify your income.

Using your line of credit account

A LOC account functions like a normal bank account except the balance is usually negative. There are options to write cheques and use a bank card on these types of account. Of course, you have to pay interest on any outstanding negative balances.

You must repay the interest every month. With some institutions and in the case of unsecured lines of credit, you must also repay some minimum percentage of the outstanding balance, usually around 3%.

Advantages and disadvantages

See also

References

  1. Financial Consumer Agency of Canada, viewed August 15, 2013.

Further reading

External links